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Buyback Math Has Something for Everyone as Capex Falls to Record

(Bloomberg) -- Looking for a moral in the way companies use the proceeds of the Donald Trump tax windfall? It’s complicated.

Critics have lambasted the overhaul for months, saying it’s a gift to corporations who will blow it on share buybacks while starving the economy of investment. In fact, according to Goldman Sachs data, the money plowed into plants and equipment will actually be pretty lavish -- unless you compare it to their total expected outlays for things like repurchases and dividends.

S&P 500 companies will allocate 27 percent of their cash to capital expenditures in 2018, the bank’s estimates show. In dollar terms, that’s $690 billion -- close to a record. On the other hand, it doesn’t seem like much compared with the $2.5 trillion the firms have in the bank. In fact, it would be the lowest proportion of money U.S. firms have used on capex since at least 1990, when Goldman Sachs started tracking the data.

As the proportion of cash going to plants and equipment shrinks, the share spent on buybacks will rise -- to a four-year high of 26 percent, the estimates show. In dollar terms, U.S. firms will spend 12 percent more on capex and 10 percent more on research and development compared with last year. The amount of money spent buying back stock will rise by 26 percent, the most since 2011.

Notably, investors have rewarded companies that prioritized investment over cash return. Goldman Sachs’ index of stocks with the highest capex and research and development spending has outperformed the stocks with the highest cash return since 2016.

Last year’s tax reform triggered debate on whether the companies will use the windfall to please shareholders or invest in growth. Goldman Sachs analysts estimate that U.S. companies will spend $650 billion on buybacks this year, while JPMorgan Chase & Co. strategists call for a jump to around $800 billion.